Sabadell confident 2024 lending income will surpass 2023 even if rates fall

Spain's Banco de Sabadell SA expects 2024 lending income to exceed that of 2023 even if the European Central Bank begins to ease monetary policy.

Sabadell recorded another quarter of net interest income (NII) growth in the three months to the end of September, rising more than 6% quarter on quarter to €1.24 billion, as higher interest rates again fed through to its loan book. NII is the difference between interest revenues and interest expenses.

The bank's third-quarter NII performance beat the S&P Global Market Intelligence mean consensus estimate. Current estimates suggest analysts expect Sabadell's NII to be close to flat in 2024.

"If [interest] rates start to go down in the second half of 2024, there is a chance that NII in the second half is lower than the first half of the year," CFO Leopoldo Alvear said during a third-quarter earnings call. "[But] in any case, even that second half of the year should be higher than the first or second half in 2023. ... I wouldn't understand why NII wouldn't grow in 2024."

More loan repricing

Among the drivers for Sabadell's positive outlook for NII in 2024 is the repricing of €8 billion of fixed-rate loans, mainly corporate, that will take place in the coming quarters.

"This repricing into higher rates ensures that, with the current forward interest rate curve, our loan yield will keep improving until next summer," said Alvear.

Sabadell's NII will also continue to benefit from a slower-than-expected repricing of deposits. "I am fairly comfortable with the idea that the overall percentage of deposits that will [require the bank to pay depositors] will be lower than those numbers that we saw in previous cycles, which got to be up to 55%," said Alvear.

The bank's strong NII performance in the three months to the end of September helped push profits up a third to €464 million quarter on quarter. Its shares were up 3.5% in early afternoon trading.

Guidance upgrade

The positive NII trend encouraged Sabadell to upgrade its guidance for full year 2023, and it now expects NII to grow a quarter in 2023 to €4.75 billion, above the €4.66 billion Market Intelligence mean consensus estimate.

Sabadell also upgraded its guidance for 2023 return on tangible equity (ROTE) — a key measure of profitability — to 11.5%. The bank had been targeting an ROTE of 6% as recently as 2021, when it published its last strategy announcement.

Still, NII growth in the fourth quarter could be "flattish," said Alvear. Smaller increases in the repricing of loans compared to 12 months ago, higher costs from wholesale funding secured from recent bond issuances, and the impact of the ECB's decision to stop the remuneration of minimum reserve requirements will combine to constrain NII in the period, Alvear added.

Sabadell is among the Spanish banks enjoying a surge in revenues and profits from higher interest rates. The relatively large proportion of variable-rate loans on Spanish lenders' balance sheets means higher rates are passed on to their borrowers more quickly. The banks' historically strong liquidity positions are also limiting competition for deposits, which would push up the rates lenders' offer to savers and reduce NII.